I’m just going to come right out and go on the record. I’m not that talented of a stock picker. I don’t have any particular skill at it and I certainly have no ability to know when the market is going up or the market is going down. You want to hear a not so secret, secret? Neither do most of high paid Wall Street stock pickers!
What? How could that be? These people go to Ivy League schools, they are the brightest of the bright at these elite schools and have access to the best and immediate information and research on the markets that can be had.
Yet, they still don’t seem to be able in large numbers, or even small numbers for that matter, to beat the ‘market’ every year.
Active traders don’t usually beat the Indices
Don’t take my word for it. Every year the S&P Indices Versus Active, SPIVA for short, conducts an in-depth study on how well active stock pickers do against the indices that their actively traded mutual funds are benchmarked against.
Due to the fact that these people are some of the highest paid people in the world, we can safely say that their performance is abysmal.
SPIVA’s research shows that only 14% of all US domestic fund managers beat the domestic fund index, 12% of all small cap fund managers beat the small cap index and only 6% of all large cap fund managers beat the large cap index.
Okay. So all I have to do is avoid the ones that don’t beat their indices and put my money in those folk’s hands and I should be all good, right? Wrong!
Traders that DO beat their Indices don’t usually do it from year to year
Here’s where things get even scarier! HOW could it get scarier than only 6% of the fund managers of large cap funds being able to beat their benchmarked index? Oh, it gets A LOT worse!
Here’s the real kicker. Not only do very few of these fund managers beat their respective index that they actively trade against on a yearly basis, the ones that DO beat their benchmark are NOT necessarily the same ones to do it from year to year!
Sobering information huh? It sure is but what does any of this have to do with timing the market? How about EVERYTHING!
Here’s why it’s directly relevant and it’s mostly based on human psychology. If you knew that there would be a very, very low chance of being able to beat the market by individually trading stocks you wouldn’t do it and therefore you’d effectively have very little need to worry about when you should enter or exit the market.
Own the game not the player
In other words, if you were inclined to simply purchase the index itself, such as the S&P 500 Index, the timing of when to purchase shares of this index would not be as important. Therefore, the need to ‘time the market’ would not even need to be a consideration. In the following post, I go into much more detail about this strategy https://thefinancialstoic.com/?p=373
In addition, if you were to adopt a ‘buy and hold’ strategy any remaining desire to ‘time the market’ would be effectively eliminated.
The reason for this is obviously if you were to buy and hold you wouldn’t necessarily care if the market were to go up or down in any given short period of time, knowing that the market has traditionally gone up over time.
In fact, since the inception of the S&P 500 in 1926, originally referred to as the Composite Index, until 2020 the S&P 500 returned an average annual rate of return of approximately 10%.
In addition, those investors that want to get in and out of the market when they perceive it to be the ‘right time’ actually hurt their financial situations.
A CNBC report identifies that when Bank of America studied this they came up with the following conclusion; Looking at data going back to 1930, the firm found that if an investor missed the S&P 500′s 10 best days each decade, the total return would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%. More detail can be found at https://www.cnbc.com/2021/03/24/this-chart-shows-why-investors-should-never-try-to-time-the-stock-market.html
Do nothing and still succeed
As a result, in order to receive that 10% annual return you wouldn’t have to have done anything but simply purchase shares of the index. No trading. No selling off and ‘rebalancing’. Nothing. Just buy as many shares of the index as you desired.
So now a couple of things have hopefully been made clear. Very few active stock pickers actually beat the market index that they benchmark themselves against each year and of those that do, there are very few of them that are the same ones from year to year.
The other thing that is clear is that if you were to adopt a buy and hold investment strategy along with purchasing the index itself, such as the S&P 500 Index, you wouldn’t have any need to concern yourself as to whether the market is up or down. You are simply looking for the overall trend of an upwardly moving market over a long period of time.
Now remember the old example of ‘time in the market’ that they taught you in school? It goes something like this;
If Mary were to invest $10,000 when she’s 25 and leaves it untouched for 40 years in an investment that returns 7% annually Mary will have an investment account worth approximately $150,000 when she is 65 years old. However, Bill on the other hand doesn’t get around to investing until he’s 40 years old.
How much will Bill have to invest in order to have an investment account worth the same as Mary, $150,000, when he turns 65 years old? Surprisingly enough, Bill will need to invest $27,500, more than 2.5 times more than Mary, in order to have the same amount of money in his account as Mary.
Conclusion
This shows that time in the market is only overcome by investing a significant amount more money at a much later time.
Effectively, time in the market can offset a portion of later invested funds due to our friend compound interest working on our behalf over those additional years that we have our money invested in the market.
All of this is very important. However, perhaps MORE important is that if you abide by a buy and hold strategy with an index fund such as the S&P 500 Index and by doing so choose time in the market versus timing the market, you are going to perform better than a vast majority of those highly paid Ivy League Wall Streeters! And you’ll get to do it year over year!
